New mandates for the IMF and World Bank.

• Author: Meltzer, Allan H.
• Position: International Monetary Fund

Much of what the charters of the International Monetary Fund and World Bank say about purposes and objectives is out of date. The current mandate of the IMF should be to reduce global risk to an attainable minimum. The mandate of the World Bank should be to facilitate social and economic development as a means of reducing poverty.

Ending the IMF's Command-and-Control System

How can the IMF reduce risk to an attainable minimum? The IMF has two principal functions that can improve the market's operations in ordinary times and in crises. One function is to increase the quantity and improve the quality of information available to private lenders. The other function is to reduce the risk of financial crises in a given country and the spread of crises to other countries, as in Latin America in the 1980s and Asia in the 1990s.

Under pressure from its critics, the IMF has made much more information available about its activities, recommendations, and assessments. This information can be used by private lenders to improve their assessment of risks in a given country. This is particularly important for making judgments in the ordinary course of lending. Many problems in developing economies arise or are exacerbated by the volume of short-term renewable loans used to finance risky, longer-term assets. Timely release of information about a country's debt structure and performance can reduce this type of lending.

Important as is the improvement of information, the most important function of the IMF is to reduce the risk of severe crises that spread internationally. Improved information contributes to that goal, but reform of IMF procedures is also important. Prodded by its critics and its new management over the last three years, the IMF improved its operations and recommendations in several ways. It now restricts the conditions attached to its loans to a small number of macroeconomic and financial measures or objectives. It appears less willing to make massive loans than in the 1990s. And it pays more attention to avoiding crises and to determinants of debt sustainability in developing countries.

The most important single change remains undone. The IMF should move from its command-and-control approach to one that relies on incentives.

Historically, the IMF has attached conditions to its loans. The country agrees to the conditions to get the loan, but it may be politically unpopular at home to enforce conditions such as expenditure reduction or tax...